Never too late to do retirement planning

Sunday

Mar 3, 2013 at 12:01 AM

Some of the assumptions we've made for generations about the best way to save and plan for retirement may no longer be true. The decline in housing and stock prices beginning with the 2008 crash, and a decline in 401(k) matches from employers, has raised the proportion of working households at risk of having too little to retire on just over half, according to the most recent analysis by the Center for Retirement Research at Boston College.

Anya Kamenetz

Some of the assumptions we've made for generations about the best way to save and plan for retirement may no longer be true. The decline in housing and stock prices beginning with the 2008 crash, and a decline in 401(k) matches from employers, has raised the proportion of working households at risk of having too little to retire on just over half, according to the most recent analysis by the Center for Retirement Research at Boston College.

On top of that, one-third of households have no access to employer-based savings plans, and almost as many - 30 percent - have less than $1,000, total, in savings and investments. And then there's the psychological fallout of the crash. Speaking personally, I know that my husband and I have too much money sitting in cash, because we're afraid to go back into the market and confused about where to invest it if we did.

But don't panic. By adjusting behaviors and planning more now, people in their 20s, 30s, 40s and even 50s can be well set for retirement. Here are the steps to follow.

The Center for Retirement Research says you won't have to work as many more years as you may think. Just half of households are ready to retire at age 65, but five years later, at age 70, the percentage rises to 85 percent. Since people are living longer, most of those households will have just as many years to enjoy retirement as earlier generations have done. Of course, this assumes that you are in good health to enjoy it!

It's easy to panic when looking at one of the retirement calculators online and seeing how little you may have to spend in retirement. $120,000, a typical savings balance for households approaching retirement, yields just $8,400 per year assuming a (generous) 7 percent annual rate of return, or $6,000 a year if you spend it down over 20 years. Add in inflation risks for those living on a fixed income, and the picture gets truly scary.

However, consider that by the time you retire, your expenses may be substantially lower than they are today. Your home may be paid off. You won't be raising kids or putting them through college (even if you want to - don't do it if you can't afford it). You will be in a lower tax bracket, and, of course, you'll no longer be saving for retirement!

Thinking about your needs in retirement should motivate you to save more. The annual personal savings rate for U.S. households was up to 6.5 percent at the end of 2012, compared to nearly zero in the days of the housing bubble.

Many personal finance experts recommend saving more like 10 percent of each paycheck. Or, if your income is volatile, as it is for so many of us, bank money when you are flush.

We're in a period of relatively low inflation and low interest rates, combined with stock market volatility and subpar housing values, meaning reliable returns are hard to find anywhere you look. But it's also true that you'll suffer by keeping too much of your money in low-earning savings or money-market accounts. Many don't want to spend the time, or don't feel sufficiently informed, to reallocate investments every few years. That's exactly why target-date funds, which adjust automatically over time, have become more popular - they're the choice of 40 percent of younger new hires.

As with any investment fund, pay close attention to management expenses, as over time small fee premiums can undercut the growth potential of your investments.

In calculating preparedness for retirement, the Center for Retirement Research assumes families will get the most out of their assets. To do this, assume you will spend down all of your home equity and convert other assets to cash in the course of retirement. The greatest gift you can leave your children and grandchildren is to model a secure and self-sufficient life. Protecting your assets for the length of life also means doing your research. Too many seniors are sucked into expensive investment products that may drain their resources faster than they can afford.

And, again, don't panic. Financial security doesn't mean a certain number in the bank-it's the relationship between what you have and what you need. No matter what stage of life you are in - or how behind the eight ball you think you are - it's not too late to take steps in the right direction.